Dallas Mavericks owner takes on SEC

Published 4:00 am, Tuesday, November 18, 2008

Photo: David Zalubowski, AP

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Mark Cuban, the controversial owner of the NBA?s Dallas Mavericks, was charged with insider trading Monday by the SEC. Dallas Mavericks owner Mark Cuban argues a call against his team while facing the Denver Nuggets in the third quarter of the Nuggets' 108-105 victory in an NBA basketball game in Denver on Friday, Nov. 7, 2008. (AP Photo/David Zalubowski) less

Mark Cuban, the controversial owner of the NBA?s Dallas Mavericks, was charged with insider trading Monday by the SEC. Dallas Mavericks owner Mark Cuban argues a call against his team while facing the Denver ... more

Photo: David Zalubowski, AP

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: WARRIORS_GAME4_0227_KW.JPGMavericks owner Mark Cuban reacts to a problem with time outs during the second quarter of the game when Golden State Warriors play the Dallas Mavericks in playoff game #4 at Oracle Arena in Oakland on Friday April 29, 2007 . Half ended tied 409 to 49 off a three pointer by Baron.Kat Wade/The Chronicle WARRIORS_GAME4_0227_KW.JPG Mavericks owner Mark Cuban reacts to a problem with time outs during the second quarter of the game when Golden State Warriors play the Dallas Mavericks in playoff game #4 at Oracle Arena in Oakland on Friday April 29, 2007 . Half ended tied 409 to 49 off a three pointer by Baron. Kat Wade/The Chronicle less

: WARRIORS_GAME4_0227_KW.JPGMavericks owner Mark Cuban reacts to a problem with time outs during the second quarter of the game when Golden State Warriors play the Dallas Mavericks in playoff game #4 at ... more

On Monday, the Securities and Exchange Commission charged the high-tech entrepreneur, ballroom dancer and Dallas Mavericks owner with illegal insider trading for allegedly using confidential information to avoid more than $750,000 in stock losses.

Cuban, a multibillionaire, has been fined more than twice that amount by the National Basketball Association for screaming at referees and other misbehavior.

In a vitriolic response posted on his Web site, Cuban said the suit "has no merit and is a product of gross abuse of prosecutorial discretion. Mr. Cuban intends to contest the allegations and to demonstrate that the Commission's claims are infected by the misconduct of the staff of its Enforcement Division."

John Coffee, a securities law professor at Columbia University, says Cuban is taking a risk by refusing to settle the SEC's civil case, which concerns his sale of stock in Mama.com (now called Copernic Inc.) in 2004.

"The No. 1 issue is whether the Department of Justice will follow suit and indict him" on criminal charges, Coffee says. Cuban "is on the path Martha Stewart was on when she did not reach a settlement" with the SEC.

Stewart was convicted and went to prison for lying to federal investigators about her well-timed sale of stock in Imclone, not for illegal insider trading.

"Most white-collar criminals get indicted for what they do after the investigation begins," Coffee says. That's why "most people decide it is wiser to settle" an SEC case. "You look guilty, but you don't create evidence that can be used against you" in a criminal case.

As a wealthy celebrity, Cuban is especially at risk. He sold his company, Broadcast.com, to Yahoo in 1999 for almost $6 billion in Yahoo stock. He quickly diversified into other ventures including the Mavericks and Landmark Theaters. He has been trying to buy the Chicago Cubs baseball team. Last year, he took a spin on "Dancing with the Stars."

"The DOJ will get much more interested if it looks like a high-profile individual is defying the SEC. You don't want to prosecute the office boy," Coffee says.

But John Hueston, a lawyer with Irell & Manella, doubts that Cuban will face criminal charges. "If they were in the offing, they would most often be announced" at the same time as the SEC's civil charges, he says.

Hueston says the case will boil down to what was said during a telephone conversation between Cuban and the chief executive of Mama.com. "That's not the makings of a criminal case," he says.

Chris Clark, a partner with Dewey & LeBoeuf who is representing Cuban, agrees. "To my knowledge there is no Department of Justice interest in this case at all. It is rare for the DOJ to bring a he-said she-said case where the conversation wasn't recorded or otherwise memorialized."

According to the suit, Cuban was the largest shareholder in Mama.com, with a 6.3 percent stake. That falls short of the 10 percent stake required to be an insider.

In June 2004, the company decided to ask Cuban to participate in a PIPE offering, which stands for private investment in public equity. In these deals, a public company asks big investors to buy new stock in the company, usually at a lower-than-market price. The offering typically causes the company's stock price to drop.

On June 28, 2004, Mama's CEO called Cuban to ask if he wanted in on the deal. He allegedly prefaced his call "by informing Cuban that he had confidential information to convey to him, and Cuban agreed" that he would keep it confidential, according to the suit.

The CEO proceeded to tell Cuban about the offering. According to the suit, "Cuban became very upset and angry during the conversation, and said, among other things, that he did not like PIPEs because they dilute the existing shareholders. At the end of the call, Cuban allegedly told the CEO, "Well, now I'm screwed. I can't sell."'

That night and the next day, Cuban sold his entire stake. In so doing, he allegedly avoided about $750,000 in losses he would have suffered June 30, when the stock price dropped after the PIPE deal was announced.

Clark says Cuban's defense will focus on that phone conversation, which "did occur," but not in the way the SEC reported.

Coffee says that unless Cuban agreed to keep the information confidential, he owed no fiduciary duty to the company and could be cleared of charges.

If the case goes to trial, its outcome will depend on whether Cuban is found "credible or not credible. That becomes very fact-specific or person-specific," says Jordan Eth, a partner with Morrison & Foerster.

Coffee speculates that Cuban might have avoided settling the SEC charges because it would have destroyed his chance of buying the Chicago Cubs.

"A settlement requires that you neither deny nor confirm your guilt. You can't make a public statement that you were innocent and the charges were without merit," Coffee says.

Yet Coffee says his failure to settle will also cost him the Cubs. "I think (the charges) would make it extremely difficult for baseball to accept him," he says.

Coffee doesn't think they will jeopardize his ownership of the Mavericks - a team which he has revitalized in recent years.

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